What is the Difference Between Merchant Account and Payment Gateway

difference between merchant account and payment gateway

Let’s discuss the difference between a merchant account and a payment gateway. If you accept credit card payments from consumers, you’ve probably heard of payment gateways and merchant accounts. You’re not alone if you’re perplexed by the distinctions. The world of internet payments is large and sometimes perplexing. 

Do they not do the same thing? Is it not possible for me to have one or the other? 

If life were that easy! Both of the aforementioned are required to receive payments from clients since they each serve a different purpose.

A merchant account is a bank account that merchants use to handle consumer payments. A payment gateway transfers funds from a customer’s account to the merchant’s account. When monies arrive in the merchant account, they are normally transferred to the business.

What Exactly Is a Merchant Account?

Isn’t a merchant account synonymous with a business account?

No, surprisingly. A merchant account is not the same thing as a company bank account. When a consumer buys anything from you, they put money into your merchant gateway account.

Consider it a “money pot” for internet enterprises that keeps consumer funds for a limited time. 

What Is a Merchant Account and How Does It Work?

Credit card payments are now among the most popular methods of payment. The money is temporarily kept in a merchant account when a customer pays online. This allows for credit card processing time. It also allows for the gathering and verification of transnational information.

When the procedure is finished, the monies are usually transferred to a company bank account.

A sum can be held in the merchant account. This can be used for a variety of purposes, including the payment of refunds. 

You may be wondering, “Why do I need a merchant account?” Can’t the money just come to me?

Unfortunately for internet sellers, the answer is no. You must have a merchant account. However, as mentioned below, merchant accounts have several advantages.

 What Are the Advantages of Having a Merchant Account?

The following are the main advantages of having a merchant account:

  • It aggregates transactions and deposits them all into your account at once. This will simplify your accounting procedure if you perform a large number of transactions every day.
  • Money in the merchant account can assist reduce transaction uncertainty. Customer returns are an example of this. 
  • It enables fraud checks to be carried out where appropriate, thanks to this source of money. Payments that are suspicious or problematic can be detected before they reach the company bank account. This might save money on hefty transaction costs.

What Exactly Is a Payment Gateway?

A payment gateway functions similarly to a bridge. It connects your customer’s bank account or another form of payment to your merchant account.

The gateway enables funds to be sent into the merchant account. This will occur when a customer’s information has been validated and the transaction has been completed. Consider this like placing your credit card into a retail card machine. It’s the first time you’re handing up your account information to a third party.

PayPal, Stripe, and WorldPay are examples of payment gateway providers. 

What Is the Purpose of a Payment Gateway?

Why can’t the money be sent directly from the customer’s account to the merchant’s account?

A payment gateway can be used for a variety of things, including:

  • At checkout, a consumer inputs their credit card or account information. It is subsequently recorded and encrypted by the system at the payment gateway. 
  • It passes the information received to a payment processor or a merchant account, which helps to keep customers’ payment data safe from fraudulent activities. Any further checks can be performed here before the funds are transferred to a company bank account. 
  • Requesting that the business accept or deny payment. There might be an issue with the customer’s payment details. The payment gateway will next inquire as to how the merchant wants to proceed. The transaction will either continue or a different payment method will be required.

Why Do You Need a Payment Gateway?

Without a payment gateway, customers would have to enter their payment details into the merchant’s store manually. It is time-consuming and insecure, leaving customers vulnerable to fraud. 

A payment gateway provides a safe and secure link between customers’ accounts and the merchants’. It also helps simplify the payment process, as customers only need to enter their payment details once. The payment gateway then transfers the payment information to the merchant’s account.

The payment gateway is necessary to provide security. When a customer enters their card or account information at checkout, it is captured and encrypted by the system. It helps to prevent fraud and keep customers’ payment details safe. 

Furthermore, the payment gateway is responsible for routing the information to the payment processor or merchant account. It allows checks to be carried out before the money is sent to the business bank account. 

Finally, the payment gateway is also responsible for asking the merchant to accept or decline the transaction. If there is an issue with the payment information provided by the customer, the payment gateway will ask the merchant how they want to proceed. The merchant can either continue with the transaction or request an alternative payment type.

Selecting a Merchant Account

How do you pick the best merchant bank account provider for your needs?

To begin, there are a few distinct sorts of merchant accounts to be aware of:

  • Providers of Payment Services (PSPs). These are especially beneficial to small enterprises. The expense of establishing your merchant account may exceed the value. Your company account gets aggregated with those of other merchants when you use a PSP. The ability to pay monthly is a perk of bulk merchant accounts. This makes it considerably cheaper for many people. With this sort of account, there is a danger of vulnerability. If you are contemplating this path, you must conduct research.
  • A standard, dedicated merchant account. You will have your merchant account. It is also recognized as a distinct entity rather than being associated with others. The disadvantage of an individual merchant account is that the charges are greater. Some firms may find the expenditures unmanageable or reasonable.
  • When shopping for a merchant account provider, keep the pricing and any payment options in mind.
  • If your company is fresh and small, look into collective merchant accounts. When you have more consumers, you can upgrade to an individual merchant account.
  • You should also investigate each provider’s processing and chargeback costs. You should be informed of any additional expenses, such as conversion rates.
  • It is critical to inquire about a merchant account provider’s anti-fraud features. You want to safeguard both yourself and your consumers.
  • When selecting a service, you should also consider asking some of the questions listed above. 

How Do You Select a Payment Gateway Service Provider?

It depends depend on the sort of business you run, much like a merchant account. You’ll also need to evaluate your company’s demands and how discover something that meets them.

Payment gateways may only be compatible with certain merchant accounts and bank types. This may not work for all consumers, so you should plan for an alternative payment method.

There are certain questions to ask while investigating payment gateway companies. These will assist you in determining whether it is appropriate for your requirements.

  • Do they accept a variety of payment methods? Many buyers still use a credit or debit card to purchase. There are other payment options to explore. Customers may, for example, utilize an e-Wallet, mobile payment, or direct debit. Your payment gateway provider should consider this.
  • What kind of fraud protection do they provide? Fraud is always a concern in the internet world. Customers and companies will be constantly mindful of it. A payment gateway devoted to fraud prevention is critical for your company. Stripe’s world-class Radar service is an excellent illustration of this. Failure to control fraud may harm your reputation. 

Final Words

It is tough to distinguish between a payment gateway and a merchant account.

The most important point is that they are not the same thing. Both are required for your company to safely receive consumer payments.

They can assist you in obtaining the information you want.

You and your customers are both exposed to fraud as business owners. This is true whether you are partially or entirely online. Having the correct payment infrastructure in place may provide you peace of mind.